London Business School and Credit Suisse
07 Feb 2012
Based on 112 years of international evidence, the Credit Suisse Investment Returns Yearbook addresses the extent to which major assets protect against inflation and deflation, how to invest while controlling currency risk and what rewards can be expected from investing in stocks, bonds and cash.
Commenting on the research Dimson, Marsh and Staunton explain: "Investors are still torn between concerns about deflation and inflation. Our research looks at how equities and bonds compare with gold, property and housing under these two scenarios. We draw a firm distinction between inflation beating and inflation hedging. Over the long run, equities have beaten inflation, but have been a poor hedge."
The Credit Suisse Global Investment Returns Yearbook and Sourcebook is produced by London Business School authors Elroy Dimson, Paul Marsh and Mike Staunton in collaboration with the Credit Suisse Research Institute. The 2012 Yearbook investigates how to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification. Risk appetite, which conceptually draws these safety and risky assets together, is now rebounding.
The accompanying Sourcebook provides a full update on investment performance since 1900 in all the main asset categories, and on risk and style premiums in global markets. Both books are published today.
Stefano Natella, Head of Global Equity Research at Credit Suisse, said: “Elroy Dimson, Paul Marsh and Mike Staunton are the worldwide authority on analysing long-run investment returns. The Credit Suisse Research Institute is proud to be associated with their work, which has had a major impact on investment analysis across asset classes and is widely followed by investors.”
The Yearbook comprises three articles, together with profiles of 19 national and 3 regional markets.
The Yearbook examines the attributes of stocks, bonds, cash, gold and real estate during inflationary and disinflationary times over the past 112 years. In terms of generating returns in excess of inflation, equities do well while inflation is within a low- to mid-single-digit range. In contrast, bonds generate the greatest returns in deflation times. The findings stress the continuing importance of diversification across assets and markets, and conclude that the case for stocks is not so much their inflation hedging properties, which are limited, but that, over the long haul, investors have enjoyed a substantial equity risk premium.
The second paper examines the impact of currency fluctuations on global portfolios. For equities, investing in a world index, rather than domestically, reduces volatility. But cross-border bond investment adds to portfolio risk, primarily through currency exposure. Short-term currency hedging is meaningful in bond portfolios, while for equities it contributes to reducing risk but to a lesser extent. However, hedging benefits decline over longer investment horizons. The paper also reveals that international investment in countries after periods of currency weakness is on average followed by superior returns; unhedged cross-border equity exposure may be more desirable at those times.
The 2012 Sourcebook provides detailed historical performance data on stocks, bonds, bills, inflation and currencies for 19 countries over the period since 1900. Updated finding on worldwide equity returns and the extent to which equities have outperformed bonds and cash are also included. Equities have mostly disappointed since the beginning of 2000; but over the long run, they have beaten inflation, bonds and cash in every country. The Sourcebook reports a size premium (the amount by which smaller companies outperform larger ones) that has been positive over long intervals and many countries; a value premium (the amount by which value stocks outperform growth stocks) that has been larger than the size premium; and a momentum premium (the amount by which past winners outperform past losers) that is largest of all. These effects are volatile, and there have been extended periods when they go into reverse.
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